options-strategy-advisor

---
name: options-strategy-advisor
description: Use when the user requests options strategy analysis: covered calls, protective puts, spreads, iron condors, straddles, earnings plays, Black-Scholes pricing, Greeks, or position sizing.
category: Strategy R&D
version: 1.0.0
tools: []
---

# Options Strategy Advisor

Analyze, explain, and simulate options strategies using theoretical pricing models, without requiring real-time market data subscriptions.

**Core capabilities:**
- **Black-Scholes Model** pricing and Greeks calculation
- Strategy P/L simulation across major options strategies
- Earnings-driven volatility plays
- Risk management: position sizing, Greeks exposure, max loss/profit analysis
- Educational explanations of strategies and risk metrics

**Data sources:** stock prices, historical volatility, dividends, and earnings dates from market data lookups; implied volatility (IV) and risk-free rate from the user when available; the **Black-Scholes Model** for theoretical pricing and Greeks otherwise.

## When to Use

- Options strategy questions ("What's a covered call?", "How does an iron condor work?")
- Strategy P/L simulation ("What's my max profit on a bull call spread?")
- Greeks analysis ("What's my delta exposure?")
- Earnings strategies ("Should I buy a straddle before earnings?")
- Strategy comparisons ("Covered call vs. protective put?")
- Position sizing guidance ("How many contracts should I trade?")
- Volatility questions ("Is IV high right now?")

## Supported Strategies

**Income:** Covered Call (own stock, sell call — income, capped upside) · Cash-Secured Put (sell put backed by cash — collect premium, willing buyer) · Poor Man's Covered Call (LEAPS call + short near-term call — capital efficient)

**Protection:** Protective Put (own stock, buy put — insurance, limited downside) · Collar (own stock, sell call + buy put — limited upside/downside)

**Directional:** Bull Call Spread · Bull Put Spread · Bear Call Spread · Bear Put Spread — defined-risk spreads expressing a directional view, credit or debit depending on strike selection

**Volatility:** Long Straddle (buy ATM call + put — profits from a big move either direction) · Long Strangle (buy OTM call + put — cheaper, needs a bigger move) · Short Straddle (sell ATM call + put — profits from no movement, unlimited risk) · Short Strangle (sell OTM call + put — profits from no movement, wider range)

**Range-Bound:** Iron Condor (bull put spread + bear call spread — profits from range-bound movement) · Iron Butterfly (sell ATM straddle, buy OTM strangle — profits from a tight range)

**Advanced:** Calendar Spread (sell near-term option, buy longer-term option — profits from time decay) · Diagonal Spread (calendar spread with different strikes — directional + time decay) · Ratio Spread (unbalanced spread with more contracts on one leg)

## Analysis Methodology

### Step 1 — Gather Inputs

Required from the user: ticker, strategy type, strike prices, expiration date(s), position size (contracts). Optional: implied volatility (fall back to historical volatility if not given), risk-free rate (default to the current 3-month T-bill rate, roughly 5.3% as of 2025). Fetch when available: current stock price, historical prices for HV, dividend yield, upcoming earnings date for earnings strategies.

### Step 2 — Estimate Historical Volatility (if IV isn't provided)

Pull recent daily price history (roughly 90 days), compute daily log returns, then annualize: HV = standard deviation of daily log returns × √252 (252 trading days per year). Present the result as an annualized percentage and note that current market IV — if the user can supply it from their broker platform — is usually more accurate than a trailing historical estimate.

### Step 3 — Price Options with the Black-Scholes Model

For European-style options:

```
Call Price = S·N(d1) − K·e^(−r·T)·N(d2)
Put Price  = K·e^(−r·T)·N(−d2) − S·N(−d1)

d1 = [ln(S/K) + (r + σ²/2)·T] / (σ·√T)
d2 = d1 − σ·√T

S = current stock price, K = strike price, r = risk-free rate,
T = time to expiration in years, σ = volatility (IV or HV),
N() = cumulative standard normal distribution
```

Subtract the present value of expected dividends from S when pricing calls. Note to the user that this is European-style pricing — it may undervalue American options with early-exercise value, and market price can also differ due to bid-ask spread.

### Step 4 — Calculate the Greeks

The Greeks measure an option's price sensitivity to different factors:

| Greek | Measures | Example |
|-------|---------|---------|
| **Delta (Δ)** | Price change per $1 move in the stock | Δ = 0.50 → ~$50 gain if stock +$1 |
| **Gamma (Γ)** | Rate of change of delta itself | Γ = 0.05 → delta rises 0.05 if stock +$1 |
| **Theta (Θ)** | Daily time decay | Θ = −$5 → loses $5/day from time passing |
| **Vega (ν)** | Sensitivity to a 1% change in IV | ν = $10 → gains $10 if IV +1% |
| **Rho (ρ)** | Sensitivity to a 1% change in rates | ρ = $2 → gains $2 if rates +1% |

For a multi-leg strategy, sum each Greek across all legs (long legs positive, short legs negative) to get the position's net exposure — e.g., a bull call spread's net delta is the long call's delta minus the short call's delta.

### Step 5 — Simulate Strategy P/L

Generate a range of hypothetical stock prices at expiration (roughly ±30% from the current price). For each price point, sum each leg's payoff: for a call, intrinsic value is `max(0, price − strike)`; for a put, `max(0, strike − price)`; long legs subtract the premium paid, short legs add the premium received, then scale by contracts.

Report the key metrics: **Max Profit** (highest possible P/L), **Max Loss** (worst possible P/L), **Breakeven Point(s)** (price where P/L = 0), and an approximate **Probability of Profit** (share of the simulated price range that's profitable).

Example output shape:
```
Bull Call Spread: $180/$185 (30 DTE, 10 contracts)
Max Profit: $2,500 (at $185+)   Max Loss: −$2,500 (at $180−)
Breakeven: $182.50   Risk/Reward: 1:1   Probability of Profit: ~55%
```

When useful, sketch the P/L curve as a simple ASCII line chart in chat (profit region above zero, loss region below, breakeven marked) rather than generating an image file.

### Step 6 — Strategy-Specific Guidance

Tailor the explanation to the strategy type. For a Covered Call, for example: state the setup (own the shares, sell a call against them), the max profit (stock's gain up to the strike, plus premium collected), the max loss (unlimited downside since the stock is owned outright), the breakeven (cost basis minus premium received), and the position's net delta (reduced from 1.00 toward the call's short delta, since the short call offsets some of the stock's directional exposure).

## Risk Management Notes

- Size positions so a single strategy's max loss stays within the user's stated risk tolerance, not just their account size
- Always state max loss explicitly — for strategies with undefined risk (short straddle/strangle, naked positions), say so clearly rather than implying a bounded loss
- Flag when a strategy's breakeven sits close to the current price, since a small move can flip the position from profit to loss
- For earnings plays, call out that implied volatility typically collapses after the earnings print ("IV crush"), which can erode a long option's value even if the stock moves in the expected direction